2025 may well prove to be a tale of two halves. In the first half, the new administration in Washington, D.C., rolled out dynamic policies that influenced the economy’s trajectory — and made prediction more difficult. The Uncertainty Index soared to levels not seen in recent memory, even exceeding the uncertainty experienced during the pandemic and the Great Recession. Since mid-year, however, the picture has become clearer. Budget reconciliation legislation has been enacted, and the likely overall effective tariff rate is increasingly evident — yet still subject to legal challenges at this time. As a result, uncertainty is starting to ease, and the index has settled at lower, though still elevated, levels.
Regarding the growth outlook, tariff announcements have contributed to abnormally large volatility in the GDP releases from the Bureau of Economic Analysis (BEA). In anticipation of tariffs last winter and spring, businesses built up inventories at an extraordinary pace, particularly in manufacturing and wholesaling, and then liquidated them over the following months. During this period, the trade balance also swung sharply, first widening and then narrowing for the same reasons — in a pattern that was somewhat unprecedented. As we move through the second half of the year, inventories are gradually being rebuilt. As such, a more predictable trend in growth is set to emerge.
As we move through Q3, labor market conditions should also normalize. Evidence of weakening emerged this summer with significant downward revisions by the Bureau of Labor Statistics (BLS) to recent employment figures. Moreover, the just-reported benchmark revision from the BLS cut 900K jobs out of past hiring figures. Taken together, the two events have pulled forward expectations of a rate cut from the Fed during this week’s September meeting of the Federal Open Market Committee.
Residential Real Estate
High interest rates, and a softening labor market, among other things, have exerted downward pressure on residential real estate. After two years of steady increases, house prices have now fallen for four consecutive months, according to one well-recognized house price index. The prospects of interest rate reductions by the Fed, however, may help turn that trend around. Notwithstanding this, some real estate survey data also looks poised to improve, and the apartment property index has been quietly rising for five quarters in a row. As such, the second half of the year may bring better conditions.
We are watchful of these developments and are expecting a tale of two halves for 2025. That should translate into a more positive outlook in the quarters ahead.
